U.N. (Jr.

) College of Science & Technology

CONTENTS

 INTRODUCTION

 FEAURES OF A BALANCESHEET

 Part of Financial Statements

 A statement

 Summary of Accounts

 Equality of both sides

 Reflect financial position at a specific time

 Follows going can concern postulate

 OBJECTIVES OR NEEDS OR IMPORTANCE OF BALANCE SHEET

 ADVANTAGES OF BALANCE SHET

 DISADVANGES OF BALANCE SHEET

 FORMAT OF BALANCE SHEET

(1)
U.N. (Jr.) College of Science & Technology

INTRODUCTION:

A balance sheet is a statement that shows the financial position of a

business at a particular point in time. It is prepared by taking up all

personal accounts and real accounts (assets and properties) together with

the next result obtained from profit and loss account. On the left hand side

of the balance sheet is not an account but is a statement prepared from the

various ledger balances. Hence, “To” or “By” is never prefixed before any

item of the balance sheet. In the balance sheet, the total assets must be

equal to the total of liabilities and capita. On a careful assessment, it is

noted that capital is the difference between assets and liabilities as what

remains after paying off the third parties belongs to the proprietor. If the

total of assets does not agree with the total of liabilities and capital, there is

definitely something wrong and the reasons for the same must be

investigated.

(2)
U.N. (Jr.) College of Science & Technology

FEATUREOF BALANCE SHEET:

1. Part of Financial Statements:

Balance sheet forms part of financial statements or final accounts of

an enterprise.

2. A statement:

Balance sheet is not an account but is a statement prepared from the

various ledger balances. Hence, “To” or “By” is never prefixed before

any item of the balance sheet.

3. Summary of Accounts:

It represents a summary of personal and real accounts that are still

open. i.e. they have not been closed through a transfer to trading and

profit and loss account. Debit balances of such accounts appear on

the right hand side of the balance sheet. i.e. the liabilities side of the

balance sheet.

4. Equality of Both Sides:

The totals of the assets and the liabilities side of the balance sheet

must agree else there is an error committed somewhere which

should be rectified.

(3)
U.N. (Jr.) College of Science & Technology

5. Reflects Financial Position at a Specific Time:

Balance sheet is a statement that presents the financial position

of an enterprise at a particular date in time and not for a fixed period

of time. This is because even a single transaction can cause a change

in the assets and liabilities of an organization.

6. Follows Going Concern Postulate:

The balance sheet shows the financial position of the business

according to going concern concept.

(4)
U.N. (Jr.) College of Science & Technology

OBJECTIVES or NEEDS or IMPORTANCE OF BALANCE SHEET:

 To determine the true financial position of business at a particular

point in time.

 To ascertain nature, value and costs of various assets involved in the

business.

 To ascertain nature, value and costs of various liabilities involved in

the business.

 To calculate the claims of proprietor to provide accurate information

about the capital invested into the business at the end of year and

any additions or deductions made into it in the current year.

 To establish the solvency of the firm at the end of the year or an

accounting period.

 To assist in preparing the opening entries in the beginning of the next

period.

(5)
U.N. (Jr.) College of Science & Technology

ADVANTAGES

Balance sheets are formatted to allow an experienced investor to

form a well-informed opinion of a company’s risk and return prospects you

can calculate financial ratios using various balance sheet items using them

to obtain a very through summary of the company’s financial health by

analyzing its cash position, working capital, liquidity and leverage. This

provides insight into the company’s likelihood of defaulting on its credit

obligations or even its bankruptcy risk. Also balance sheet items allow you

to assess a company’s asset turnover rates a measure of how efficiently a

company uses its assets and key profitability and return measures such as

return on equity.

(6)
U.N. (Jr.) College of Science & Technology

DISADVANTAGES

Because the balance sheet is a snapshot of financial position at a

given point in time. Its figures can be misleading. For example; a

company’s cash position at year-en may appear very high implying strong

liquidity reserves. However it may be the company’s intent to distribute a

large portion of that cash to share holders in the form of a dividend, which

would distort your analysis. Also, balance sheet figures alone can be less

informative without benchmark data from peer companies used for

comparison. This can be complicated by companies using different

accounting conventions which can distort balance sheet measures. Finally,

many balance sheet items, such as fixed assets are reported at their

historical cost basis the amount an asset was purchased for which often has

little to do with their fair market value, which is more meaningful.

(7)
U.N. (Jr.) College of Science & Technology

FORMAT OF BALANCE SHEET

Liabilities Amount Assets Amount

Sundry creditors Xxx Cash in hand Xxx

Bill payable Xxx Cash at bank Xxx

Bank overdraft xxx Bill receivable xxx

Outstanding exp. xxx Sundry debtors Xxx

Mortgage loans Xxx Investments Xxx

Reserve fund Xxx Closing stock xxx

Xxx Loose tools Xxx

Capital Xxx Prepaid expenses Xxx

Add:Net profitor xxx Furniture & fittings xxx

Less: Net Loss Xxx Plant & machinery Xxx

Xxx Land & buildings Xxx

Less: Drawings Xxx Business premises xxx

Xxx Patents & trademark

Less: Income tax Xxx Good will Xxx

Xxx Xxx

(8)